Credit: URDEE IMAGE/ZUMA WIRE/ALAMY LIVE NEWS

By Antoinette Sayeh and Ralph Chami
Jun 4 2020 (IPS)

The COVID-19 pandemic is crippling the economies of rich and poor countries alike. Yet for many low-income and fragile states, the economic shock will be magnified by the loss of remittances—money sent home by migrant and guest workers employed in foreign countries.

Remittance flows into low-income and fragile states represent a lifeline that supports households as well as provides much-needed tax revenue. As of 2018, remittance flows to these countries reached $350 billion, surpassing foreign direct investment, portfolio investment, and foreign aid as the single most important source of income from abroad (see Chart 1). A drop in remittance flows is likely to heighten economic, fiscal, and social pressures on governments of these countries already struggling to cope even in normal times.

Remittances are private income transfers that are countercyclical—that is, they flow from migrants into their source country when that country is experiencing a macroeconomic shock. In this way, they insure families back home against income shocks, supporting and smoothing their consumption. Remittances also finance trade balances and are a source of tax revenue for governments in these countries that rely on value-added tax, trade, and sales taxes (Abdih and others 2012).

In this pandemic, the downside effect of remittances drying up calls for an all-hands-on-deck response—not just for the sake of the poor countries, but for the rich ones as well. First, the global community must recognize the benefit of keeping migrants where they are, in their host countries, as much as possible. Retaining migrants helps host countries sustain and restart core services in their economies and allows remittances to recipient countries to keep flowing, even if at a much-reduced level. Second, donor countries and international financial institutions must also step in to help migrant-source countries not only fight the pandemic but also cushion the shock of losing these private income flows, just when these low-income and fragile countries need them most.

Transmission of shocks

Remittances are income flows that sync the business cycle of many recipient countries with those of sending countries. During good times, this relationship is a win-win, furnishing much-needed labor to fuel the economies of host countries and providing much-needed income to families in the migrants’ home countries. However, this close business cycle linkage between host and recipient countries has a downside risk. Shocks to the economies of migrant-host countries—just the sorts of shocks being caused by the coronavirus pandemic—can be transmitted to those of the remittance-recipient countries. For example, for a recipient country that receives remittances representing at least 10 percent of its annual GDP, a 1 percent decrease in the host country’s output gap (the difference between actual and potential growth) will tend to decrease the recipient country’s output gap by almost 1 percent (Barajas and others 2012). Remittances represent much more than 10 percent of GDP for many countries, led by Tajikistan and Bermuda, at more than 30 percent (see Chart 2).

The pandemic will deliver a blow to remittance flows that may be even worse than during the financial crisis of 2008, and it will come just as poor countries are grappling with the impact of COVID-19 on their own economies. Migrant workers who lose their employment are likely to reduce remittances to their families back home. Recipient countries will lose an important source of income and tax revenue just when they need it most (Abdih and others 2012). In fact, according to the World Bank, remittance flows are expected to drop by about $100 billion in 2020, which represents roughly a 20 percent drop from their 2019 level (see Chart 3). Fiscal and trade balances would be affected, and countries’ ability to finance and service their debt would be reduced.

Banks in migrant-source countries rely on remittance inflows as a cheap source of deposit funding since these flows are altruistically motivated. Unfortunately, these banks are now likely to see their cost of operations increase, and their ability to extend credit—whether to the private sector or to finance government deficits—will be greatly reduced (Barajas and others 2018). Furthermore, the typically credit-constrained private sector—mostly comprising self-employed people and small and medium-sized enterprises—is likely to lose remittance funding, in addition to dealing with even tighter credit conditions from banks. All this will come on top of lower demand for their services and products as a result of the crisis.

That’s not all. A prolonged crisis could worsen pressure in labor markets of rich countries, and out-of-work migrants could lose their resident status in host countries and be forced to return home. For example, in Gulf states such as Saudi Arabia and the United Arab Emirates, which rely on migrant labor from the Middle East, North Africa, and Southeast Asia, the drop in the price of oil and economic activity could result in migrants (some of whom are already infected with the virus) returning home. They are likely to join the jobless in their home countries—in labor markets already brimming with unemployed youth—as well as put more pressure on already fragile public health systems. This could heighten social pressure in countries already ill prepared to deal with the pandemic and possibly also fuel spillovers beyond their borders. People escaping tough situations in their own countries are likely to seek other shores, but richer countries, also in the midst of fighting the virus, may have very little desire to allow migrants in—potentially leading to an even greater refugee crisis.

Global threat

Compared with previous economic crises, this pandemic poses an even greater threat to countries that rely heavily on remittance income. The global nature of this crisis means that not only will recipient countries see remittance flows dry up, they will simultaneously experience outflows of private capital, and maybe a reduction in aid from struggling donors. Typically, when private capital flees a country because of a macroeconomic shock, whether climate related or because of a deterioration in the country’s terms of trade, remittance flows come in to lessen the impact of capital flight. By contrast, in this current crisis, poor countries can expect to experience both phenomena—capital flight as well as a drop in remittance flows.

With global demand likely to suffer, it would be hard for remittance-recipient countries to export their way out of this crisis. Currency depreciation cannot be expected to spur demand for their exports or attract tourism since this shock is systemic (Barajas and others 2010). Currency weakness will likely worsen the economic situation for many of these low-income and fragile states whose debt is in foreign currency, further depressing local demand and resulting in greater shrinkage of local economies.

What can be done?

The crisis has the unique effect of tightening fiscal constraints in low-income migrant-source countries just when there’s much more for the public sector to do, both in terms of protecting the population from the pandemic and supporting local economies in weathering huge negative shocks. The loss of tax revenue resulting from the drop in remittance- supported consumption will only make things worse for governments already strapped for funds and severely strain their ability to engage in countercyclical fiscal measures. This creates tremendous urgency for the international community to help, even when rich countries are themselves facing huge fiscal burdens.

It is in the best interest of rich countries for migrants not to go home as well as to provide resources for poor countries to fight the pandemic. Infection rates are much higher in rich countries and are especially high among migrant workers owing to their dismal working and housing conditions. Migrants who go home are at risk of taking the virus with them. If this happens, poor countries will provide a rich incubator for the virus that will boomerang as refugees seek new shores. Then it will take decades—and many lives—for the world to be rid of this virus.

Three key actions need to be taken now.

First, host countries need to stabilize the employment opportunities of the migrant workers in their economies. Relief packages that target employment protection for citizens in rich countries can also help migrant workers remain employed. Recognizing the need to protect and stabilize the welfare of migrant workers, the prime minister of Singapore recently assured migrant workers in his country that “we will look after your health, your welfare, and your livelihood. We will work with your employers to make sure that you get paid and you can send money home . . . This is our duty and responsibility to you and your families.” Action by host countries can help keep the remittance lifeline alive, as well as reduce the likelihood of migrants returning home.

Extending protection to migrants will also help advanced economies get back to full production sooner. If host countries send migrants back, it will take even longer to restore production in rich countries to former levels. In countries such as the United States that depend on seasonal labor, keeping migrants within their borders and enhancing testing for infection will bring a double benefit—ensuring the supply of fresh agricultural products for the host country and preserving remittances for migrants’ home countries.

Second, countries receiving returning migrants will need help to contain, mitigate, and reduce the escalation of outbreaks. Donor countries must help with the cost of virus mitigation, in an effort to lessen the severity of the crisis in local economies and stave off potential spillovers.

Returning migrants are likely to place further stress on the health care systems of migrant-source countries, which are struggling to contain local infections and avoid a shutdown of the local economy. Authorities in these countries will need enhanced testing as much as possible in urban areas, as well as support in implementing quarantine measures for returning migrants who may be infected. If the return of migrants is handled in this manner, there could be longer-term benefits for their home countries as well. Migrants who expect to be permanently repatriated may bring their savings with them, and their work skills could bring development benefits to their home countries.

Third, given that poor countries’ governments have limited room for maneuver, these countries will need the assistance of international financial institutions and the donor community. International financial institutions need to shore up fiscal and balance of payments assistance to these countries. This should include ensuring that these countries’ most vulnerable people—those most reliant on remittance inflows for their consumption and well-being—are able to access social insurance programs. And, perhaps now more than ever, the global effort to meet Sustainable Development Goal 10, reducing the high cost of remittances to 3 percent, could take center stage.

This crisis makes it clear that as a global community we, rich and poor countries, are all in this together. We can either lift all boats or, together, face the consequences of rising social inequality.

Excerpt:

By Ralph Chami, Sena Oztosun, Thomas Cosimano, and Connel Fullenkamp
WASHINGTON DC, Sep 24 2019 (IPS)

When it comes to saving the planet, one whale is worth thousands of trees.

Scientific research now indicates more clearly than ever that our carbon footprint—the release of carbon dioxide (CO₂) into the atmosphere where it contributes to global warming through the so-called greenhouse effect—now threatens our ecosystems and our way of life.  But efforts to mitigate climate change face two significant challenges. 

The first is to find effective ways to reduce the amount of CO₂ in the atmosphere or its impact on average global temperature.  The second is to raise sufficient funds to put these technologies into practice.

Many proposed solutions to global warming, such as capturing carbon directly from the air and burying it deep in the earth, are complex, untested, and expensive. What if there were a low-tech solution to this problem that not only is effective and economical, but also has a successful funding model?

An example of such an opportunity comes from a surprisingly simple and essentially “no-tech” strategy to capture more carbon from the atmosphere: increase global whale populations.

Marine biologists have recently discovered that whales—especially the great whales—play a significant role in capturing carbon from the atmosphere (Roman and others 2014).  And international organisations have implemented programs such as Reducing Emissions from Degradation and Deforestation (REDD) that fund the preservation of carbon-capturing ecosystems.

Adapting these initiatives to support international efforts to restore whale populations could lead to a breakthrough in the fight against climate change.

The carbon capture potential of whales is truly startling.  Whales accumulate carbon in their bodies during their long lives. When they die, they sink to the bottom of the ocean; each great whale sequesters 33 tons of CO₂ on average, taking that carbon out of the atmosphere for centuries. A tree, meanwhile, absorbs only up to 48 pounds of CO₂ a year.

Protecting whales could add significantly to carbon capture because the current population of the largest great whales is only a small fraction of what it once was.

Sadly, after decades of industrialised whaling, biologists estimate that overall whale populations are now to less than one fourth what they once were. Some species, like the blue whales, have been reduced to only 3 percent of their previous abundance.

Thus, the benefits from whales’ ecosystem services to us and to our survival are much less than they could be. But this is only the beginning of the story.

The whale pump

Wherever whales, the largest living things on earth, are found, so are populations of some of the smallest, phytoplankton. These microscopic creatures not only contribute at least 50 percent of all oxygen to our atmosphere, they do so by capturing about 37 billion metric tons of CO₂, an estimated 40 percent of all CO₂ produced.

To put things in perspective, we calculate that this is equivalent to the amount of CO₂ captured by 1.70 trillion trees—four Amazon forests’ worth—or 70 times the amount absorbed by all the trees in the US Redwood National and State Parks each year. More phytoplankton means more carbon capture.

In recent years, scientists have discovered that whales have a multiplier effect of increasing phytoplankton production wherever they go. How? It turns out that whales’ waste products contain exactly the substances—notably iron and nitrogen—phytoplankton need to grow.

Whales bring minerals up to the ocean surface through their vertical movement, called the “whale pump,” and through their migration across oceans, called the “whale conveyor belt.” Preliminary modelling and estimates indicate that this fertilising activity adds significantly to phytoplankton growth in the areas whales frequent.

Despite the fact that nutrients are carried into the ocean through dust storms, river sediments, and upwelling from wind and waves, nitrogen and phosphorus remain scarce and limit the amount of phytoplankton that can bloom in warmer parts of the oceans.

In colder regions, such as in the Southern Ocean, the limiting mineral tends to be iron. If more of these missing minerals became available in parts of the ocean where they are scarce, more phytoplankton could grow, potentially absorbing much more carbon than otherwise possible.

Letting whales live

This is where the whales come in. If whales were allowed to return to their pre-whaling number of 4 to 5 million—from slightly more than 1.3 million today—it could add significantly to the amount of phytoplankton in the oceans and to the carbon they capture each year.

At a minimum, even a 1 percent increase in phytoplankton productivity thanks to whale activity would capture hundreds of millions of tons of additional CO₂ a year, equivalent to the sudden appearance of 2 billion mature trees. Imagine the impact over the average lifespan of a whale, more than 60 years.

Despite the drastic reduction in commercial whaling, whales still face significant life-threatening hazards, including ship strikes, entanglement in fishing nets, waterborne plastic waste, and noise pollution. While some species of whales are recovering—slowly—many are not.

Enhancing protection of whales from human-made dangers would deliver benefits to ourselves, the planet, and of course, the whales themselves. This “earth-tech” approach to carbon sequestration also avoids the risk of unanticipated harm from suggested untested high-tech fixes.

Nature has had millions of years to perfect her whale-based carbon sink technology. All we need to do is let the whales live. 

Now we turn to the economic side of the solution. Protecting whales has a cost. Mitigating the many threats to whales involves compensating those causing the threats, a group that includes countries, businesses, and individuals. Ensuring that this approach is practical involves determining whales’ monetary value.

International public good

Whales produce climate benefits that are dispersed all over the globe. And because people’s benefits from the existence of whales do not diminish the benefits that others receive from them, they are a textbook public good.

This means that whales are affected by the classic “tragedy of the commons” that afflicts public goods: no individual who benefits from them is sufficiently motivated to pay their fair share to support them.

Just think of the importance of earth’s atmosphere to our survival. Even though all nations acknowledge that everyone has an interest in preserving this common resource for the future, global coordination remains a problem.

To solve this international public goods problem, we must first ask, What is the monetary value of a whale? Proper valuation is warranted if we are to galvanise businesses and other stakeholders to save the whales by showing that the benefits of protecting them far exceed the cost.

We estimate the value of an average great whale by determining today’s value of the carbon sequestered by a whale over its lifetime, using scientific estimates of the amount whales contribute to carbon sequestration, the market price of carbon dioxide, and the financial technique of discounting.

To this, we also add today’s value of the whale’s other economic contributions, such as fishery enhancement and ecotourism, over its lifetime.  Our conservative estimates put the value of the average great whale, based on its various activities, at more than $2 million, and easily over $1 trillion for the current stock of great whales.     

But there is still the question of how to reduce the myriad dangers to whales, such as ship strikes and other hazards. Luckily, economists know how these types of problems can be solved. In fact, a potential model for such solutions is the United Nations (UN) REDD program.

Recognising that deforestation accounts for 17 percent of carbon emissions, REDD provides incentives for countries to preserve their forests as a means of keeping CO₂ out of the atmosphere.

In a similar way, we can create financial mechanisms to promote the restoration of the world’s whale populations. Incentives in the form of subsidies or other compensation could help those who incur significant costs as a result of whale protection. For example, shipping companies could be compensated for the cost of altered shipping routes to reduce the risk of collisions.

This solution, however, raises questions that are tricky to answer. To begin with, a financial facility for protecting whales and other natural assets must be set up and funded.  Exactly how much should we be willing to spend on protecting the whales?

We estimate that, if whales were allowed to return to their pre-whaling numbers—capturing 1.7 billion tons of CO₂ annually—it would be worth about $13 per person a year to subsidise these whales’ CO₂ sequestration efforts.

If we agree to pay this cost, how should it be allocated across countries, individuals, and businesses?  How much should each individual, company, and country that must bear some of the cost of protecting whales be compensated? And who will oversee the compensation, and monitor compliance with the new rules?

International financial institutions, in partnership with other UN and multilateral organisations, are ideally suited to advise, monitor, and coordinate the actions of countries in protecting whales.

Whales are commonly found in the waters around low-income and fragile states, countries that may be unable to deal with the needed mitigation measures. Support for these countries could come, for example, from the Global Environment Facility, which typically provides support to such countries to meet international environmental agreements.

The IMF is also well placed to help governments integrate the macroeconomic benefit that whales provide in mitigating climate change, as well as the cost of measures to protect the whales, into their macro-fiscal frameworks. 

The World Bank has the expertise to design and implement specific programs to compensate private sector actors for their efforts to protect whales.  Other UN and multilateral organisations can oversee compliance and collect data to measure the progress of these efforts.

A new mindset

Coordinating the economics of whale protection must rise to the top of the global community’s climate agenda. Since the role of whales is irreplaceable in mitigating and building resilience to climate change, their survival should be integrated into the objectives of the 190 countries that in 2015 signed the Paris Agreement for combating climate risk.

International institutions and governments, however, must also exert their influence to bring about a new mindset—an approach that recognises and implements a holistic approach toward our own survival, which involves living within the bounds of the natural world.

Whales are not a human solution—these great creatures having inherent value of their own and the right to live—but this new mindset recognises and values their integral place in a sustainable ocean and planet.

Healthy whale populations imply healthy marine life including fish, seabirds, and an overall vibrant system that recycles nutrients between oceans and land, improving life in both places.

The “earth-tech” strategy of supporting whales’ return to their previous abundance in the oceans would significantly benefit not only life in the oceans but also life on land, including our own.

With the consequences of climate change here and now, there is no time to lose in identifying and implementing new methods to prevent or reverse harm to the global ecosystem.  This is especially true when it comes to improving the protection of whales so that their populations can grow more quickly.

Unless new steps are taken, we estimate it would take over 30 years just to double the number of current whales, and several generations to return them to their pre-whaling numbers. Society and our own survival can’t afford to wait this long.

Excerpt:

Beirut, Lebanon

By Anne Oeking, Ralph Chami, Ekkehard Ernst, and Connel Fullenkamp
WASHINGTON DC, Oct 18 2018 (IPS)

Workers’ remittances—the money migrants send home to their families—command the attention of economists and policymakers because of their potential to improve the lives of millions of people.

Amounting to over $400 billion in 2017, remittances rank between official development assistance and foreign direct investment in terms of size. Such massive financial flows have important consequences for the economies that receive them, especially when many countries receive flows that are large relative to the size of their exports or even their economies.

Many argue that remittances help economies in two ways. First, because remittances are person-to-person transfers motivated by family ties, these transfers from outside the country help relatives back home afford the necessities of life.

But remittances also have the potential to fuel economic growth, by funding investment in human or physical capital or by financing new businesses.

Economists have worked to measure both of these effects. Many studies confirm that remittances are essential in the battle against poverty, lifting millions of families out of deprivation or bare subsistence.

But at the same time, economic research has failed to find that remittances make a significant contribution to a country’s economic growth (see Chart 1).

The latter result is puzzling, especially given the finding that remittance income helps families consume more. Consumption spending is a driver of short-term economic growth, which in turn should also lead to longer-term growth as industries expand to meet the increased demand.

But research that digs deeper into the remittance-growth nexus increasingly suggests that remittances change economies in ways that reduce growth and increase dependence on these funds from abroad. In other words, there is increasing evidence of a remittance trap that causes economies to get stuck on a lower-growth, higher-emigration treadmill.

Consider the case of Lebanon. For many years, this country has been one of the leading recipients of remittances, in both absolute and relative terms. During the past decade, inflows have averaged over $6 billion a year, equal to 16 percent of GDP. Lebanon received $1,500 a person in 2016, more than any other nation, according to IMF data.

Given the size of these inflows, it should not be surprising that remittances play a key if not leading role in Lebanon’s economy. They constitute an essential part of the country’s social safety net, accounting on average for over 40 percent of the income of the families that receive them.

But research that digs deeper into the remittance-growth nexus increasingly suggests that remittances change economies in ways that reduce growth and increase dependence on these funds from abroad. In other words, there is increasing evidence of a remittance trap that causes economies to get stuck on a lower-growth, higher-emigration treadmill.
They have undoubtedly played a vital stabilizing role in a country that has endured civil war, invasions, and refugee crises in the past several decades. In addition, remittances are a valuable source of foreign exchange, amounting to 50 percent more than the country’s merchandise exports. This has helped Lebanon maintain a stable exchange rate despite high government debt.

While remittances have helped the Lebanese economy absorb shocks, there is no evidence that they have served as an engine of growth. Real per capita GDP in Lebanon grew only 0.32 percent on average annually between 1995 and 2015. Even during 2005–15, it grew at an average annual rate of only 0.79 percent.

Lebanon is not an isolated example. Of the 10 countries that receive the largest remittance inflows relative to their GDP—such as Honduras, Jamaica, the Kyrgyz Republic, Nepal, and Tonga—none has per capita GDP growth higher than its regional peers.

And for most of these countries, growth rates are well below their peers. It is important to recognize that each of these countries is dealing with other issues that may also interfere with growth. But remittances appear to be an additional determining factor rather than just a consequence of slow growth. And remittances may even amplify some of the other problems that restrict growth and development.

Returning to the case of Lebanon, the country’s well-educated population could be expected to point to robust growth. Lebanese families, including those who receive remittances, spend much of their income on educating their young people, who score much higher on standardized mathematics tests than their peers in the region.

Lebanon is also home to three of the top 20 universities in the Middle East, and researchers at these universities produce more research than their regional peers. Lebanon’s abundant remittance inflows could provide seed capital to fund business start-ups led by its well-educated citizens.

But statistics show that Lebanon has much less entrepreneurial activity than it should, especially in the high-tech information and communication technology sector. The size of this sector is less than 1 percent of GDP, and Lebanon scores very low on international gauges of this sector’s development.

Studies of the overall spending habits of remittance-receiving households in Lebanon show that less than 2 percent of inflows goes toward starting businesses. Instead, these funds are typically spent on nontraded goods such as restaurant meals and services, and on imports.

Instead of starting new businesses—or even working in established ones—many young Lebanese choose to emigrate. The statistics are stark: up to two-thirds of male and nearly half of female university graduates leave the country. Employers complain of an emigration brain drain that has caused a dearth of highly skilled workers.

This shortage has been identified as a leading obstacle to diversifying Lebanon’s economy away from tourism, construction, and real estate, its traditional sources of growth. For their part, young people who choose to seek their fortune elsewhere cite a lack of attractive employment opportunities at home.

Part of the remittance trap thus appears to be the use of this source of income to prepare young people to emigrate rather than to invest in businesses at home. In other words, countries that receive remittances may come to rely on exporting labor, rather than commodities produced with this labor. In some countries, governments even encourage the development of institutions that specialize in producing skilled labor for export.

But why would this situation develop and persist?

Research into both the household-level and economy-wide effects of remittances on their recipients provides an answer to this question. The impact on individual countries that receive significant remittances—such as Egypt, Mexico, and Pakistan—has been studied, and cross-country analysis of a variety of countries that receive various amounts of remittances (and of those that send rather than receive remittances) has been performed as well. The insights from the academic literature can be combined into a consistent explanation of how and why economies that receive significant remittance inflows may become stuck at low levels of growth.

To begin with, remittances are spent mostly on household consumption, and the demand for all products (nontraded and traded) in an economy increases as remittances grow.

This places upward pressure on prices. The flood of foreign exchange, along with higher prices, makes exports less competitive, with the result that their production declines. Some have referred to this syndrome as Dutch disease (see Chart 2).

The effect of remittances on work incentives makes this problem worse, by increasing the so-called reservation wage—that is, the lowest wage at which a worker would be willing to accept a particular type of job. As remittances increase, workers drop out of the labor force, and the resulting increase in wages puts more upward pressure on prices, further reducing the competitiveness of exports.

Resources then flow away from industries producing tradable products that face international competition toward those that serve the domestic market. The result: a decline in the number of better-paid, high-skill jobs, which are typical in the traded sector, and an increase in low-skill, poorly paid jobs in the nontraded sector.

This shift in the labor market encourages higher- skilled workers to emigrate in search of better-paying jobs. Meanwhile, the cost of living for most families rises along with domestic prices, and the loss in competitiveness means that more products must be imported, hurting economic growth. This in turn increases the incentive for family members to emigrate so that they can send money home to help relatives shoulder the burden of the higher cost of living.

To make matters worse, remittances are often spent on real estate, causing home prices to rise and in some cases stoking property bubbles. This provides a motive to emigrate for young people seeking to earn enough to buy a home. The result of all this is a vicious circle of emigration, economic stagnation, rising cost of living, and more emigration.

Governments could potentially mitigate or break this cycle by taking steps to keep domestic industries competitive. But policies that can accomplish this, such as improving the education system and physical infrastructure, are expensive and take years to implement. And they require strong political will to succeed.

As research has shown, however, remittances have important political economy side effects (see Chart 3). In particular, large inflows allow governments to be less responsive to the needs of society.

The reasoning is simple: families that receive remittances are better insulated from economic shocks and are less motivated to demand change from their governments; government in turn feels less obligated to be accountable to its citizens.

Many politicians welcome the reduced public scrutiny and political pressure that come with remittance inflows. But politicians have other reasons to encourage remittances. To the extent that governments tax consumption—say through value-added taxes—remittances enlarge the tax base. This enables governments to continue spending on things that will win them popular support, which in turn helps politicians win reelection.

Given these benefits, it is little wonder that many governments actively encourage their citizens to emigrate and send money home, even establishing official offices or agencies to promote emigration in some cases.

Remittances make politicians’ job easier, by improving the economic conditions of individual families and making them less likely to complain to the government or scrutinize its activities. Official encouragement of migration and remittances then makes the remittance trap even more difficult to escape.

The absence of clear evidence linking remittances to increased economic growth—and the lack of examples of countries that experienced remittance-led growth—suggests that remittances do indeed interfere with economic growth. The example of Lebanon, moreover, gives a concrete example of how the remittance trap may operate.

And if a remittances trap does exist, then what?

Clearly, given their importance to the well-being of millions of families, remittances should not be discouraged. Is the remittance trap simply the cost societies must bear in exchange for a reduction in poverty? Not necessarily.

Preventing the two downsides of remittances—Dutch disease and weaker governance—could help countries avoid or escape the remittance trap. Improving the competitiveness of industries that face foreign competition is the general prescription for mitigating Dutch disease.

Specific measures include upgrading a country’s physical infrastructure, improving the education system, and reducing the cost of doing business. Governments could also play a more active role in stimulating new business formation, including seed funding or other financial assistance for start-ups. At the same time, remittance-receiving countries must also push for stronger institutions and better governance.

Enhancing economic competitiveness and strengthening governance and social institutions are already considered essential to the inclusive growth agenda. But the remittance trap lends urgency to these goals.

Avoiding this potentially serious pitfall of remittances may actually be the key to unlocking their development potential by removing a previously unrecognized obstacle to inclusive development.

*Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

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